Morgan Stanley: America could go into recession before next spring if the US-China trade war escalates

Reuters/Brendan McDermid

• The US economy could plunge into recession before next spring if the US-China trade war escalates, says Morgan Stanley's chief economist.
• If the Trump administration slaps 25% tariffs on $300 billion of Chinese imports and Beijing retaliates, America could enter a recession within nine months, wrote Chetan Ahya in a report.
• Growth in global imports of capital goods and global fixed investment has already slowed, Ahya told the Financial Times.
• Separately, JPMorgan pegs the chances of a second-half recession at 40%, up from 25% a month ago, while Goldman Sachs has lowered its second-half growth forecast by 0.5 percentage points to 2%.

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The US economy could plunge into recession before next spring if the US-China trade war continues to escalate, says Morgan Stanley's chief economist.

If President Donald Trump follows through with his threat to slap 25% tariffs on a further $300 billion of Chinese imports, and Beijing retaliates, America's economy could shrink for two successive quarters within nine months, Chetan Ahya said in a recent note to clients seen by Markets Insider.

Trade fears may already be depressing investment flows. Growth in global imports of capital goods fell to -3% in the first quarter of this year - its lowest level in more than three years - while growth in global fixed investment slowed by 1.3 percentage points to 3.4%, Ahya told the Financial Times.

"Recent conversations with investors have reinforced the sense that markets are underestimating the impact of trade tensions," Ahya wrote. "Investors are generally of the view that the trade dispute could drag on for longer, but they appear to be overlooking its potential impact on the global macro outlook."

Separately, JPMorgan pegs the chances of a US recession in the second half of this year at 40%, up from 25% a month ago, according to Bloomberg. Economists at Goldman Sachs, anticipating the Trump administration will impose 10% tariffs on virtually all Chinese imports and on all Mexican goods, lowered their second-half US growth forecast by about 0.5 percentage points to 2%, according to a research note.

International trade tensions have risen in recent weeks. After accusing China of sabotaging a prospective trade agreement, Trump hiked tariffs on $200 billion worth of Chinese goods, blacklisted Huawei as a trading partner over espionage concerns, and began preparations to extend tariffs to virtually all US imports from China.

China has retaliated by raising tariffs on $60 billion worth of US products, threatening the US supply of rare-earth metals, appearing to test its 'nuclear option' of selling US Treasurys, and announcing an investigation into FedEx.

The Trump administration has targeted other countries too. It plans to impose 5% tariffs on all Mexican imports starting in a week's time, rising steadily to 25% by October unless illegal immigration at the southern border is halted. Trump also revoked India's status as a "beneficiary developing country," which exempted billions of dollars of its products from US tariffs, in a proclamation last week.

Raising the costs of trade and sparking retaliation by other countries could undermine Trump's efforts to create jobs and boost the US economy. Trade wars can be costly, disruptive, and weaken consumer and business confidence, depressing spending and investment and sapping growth.